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The Big Banks are Crumbling

A group of the world’s biggest banks finally seem to be getting their comeuppance as investors avoid these shares like the plague.

After years of appearing to ride high above the fray on the back of bailout recapitalization, the big banks have fallen on hard times.

Half-Trillion Dollars—Poof!

The 2016 calendar year has been miserably unkind to banks. In addition to bank insolvency fears in Europe, especially with Italian banks, the world’s 20 largest banking institutions have lost a combined $500 billion due to tumbling share prices. That’s half a trillion dollars! The carnage has not been limited to one region: banks in Europe, North America, and Asia have all felt the pain. However, a continent-wide economic crisis and the impending implosion of the European Union have hit firms in the eurozone the hardest.

The chart below from the Wall Street Journalelegantly demonstrates the severe drop in the banks’ market value.

Source: FactSet via Wall Street Journal

Unbelievably, industry giants like Barclays, Credit Suisse, and Deutsche Bank have seen their share prices halved over the first half of the year. Although this dramatic downturn is certainly causing some observers to panic about the ability of the markets and the global economy to withstand such shaky financial foundations, it’s hard not to reason that the banks are largely getting what they deserve.

The implications seem rather obvious: Central banks want to insulate themselves from the mayhem with a hard asset that can serve as a safe haven. It’s no coincidence that the bond market is experiencing its own near-collapse with yield curves around the world plunging into negative territory.

Image via Wealth Monitor

Some will suggest that real estate is the premier hard asset, but we have all seen how unreliable the real estate market can be at preserving wealth. No matter what anyone suggests, central banks do not hold gold merely as a “tradition”; rather, gold is still the de facto bedrock that underpins the value of money and the financial system at large. Why does the IMF, essentially the “central bank of central banks,” hold several thousand metric tonnes of monetary gold? Simply because they’re maintaining some (very expensive) tradition? The continued gold purchases by the world’s monetary authorities demonstrates that this fanciful notion is hardly the case, rendering such suggestions nothing more than intellectual dishonesty.

2016 is shaping up in the same direction in terms of central bank gold purchases. China is generally the most active buyer in this regard, although they have been challenged by Russia in this arena recently. Moreover, China is both the planet’s largest producer and largest consumer of the yellow metal. During June, the People’s Bank of China added roughly a half-million troy ounces of gold to its reserves. This is a continuation of its de-dollarization strategy of diversifying into safer assets, a much-needed shift away from its massive accumulation of dollar-denominated reserves. (China and Japan are the world’s two largest holders of U.S. liabilities.)

As the big banks rapidly crumble and central banks try to insulate themselves with the safety of gold, one can only look on in morbid fascination while stacking as much precious metals as possible.

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.